Collections and charge-offs

A charge-off happens when a creditor writes off a debt as a loss after months of missed payments. You may still owe the debt, and the creditor may sell it to a collection agency.

When a debt is placed with or sold to a collector, a separate collection account can appear on your report. The original account should show a $0 balance once sold, so the same debt isn't counted twice. If both show a balance, that's worth disputing.

Under Regulation F, a debt collector generally can't furnish information about a debt to a credit bureau until it has communicated with you about the debt, for example by speaking with you or by mailing you a notice and waiting a reasonable time to see whether it comes back undeliverable (12 CFR § 1006.30(a)). The rule targets "passive" collection, where a collection account showed up on someone's report before they'd ever heard about the debt.

Regulation F also bars collectors from selling, transferring, or placing for collection a debt they know or should know has been paid, settled, or discharged in bankruptcy (§ 1006.30(b)).

• Time of day. Collectors generally can't contact you before 8 a.m. or after 9 p.m. your local time (15 U.S.C. § 1692c).
• Work. They can't contact you at work if they know or have reason to know your employer prohibits it.
• Stop contact. If you tell a collector in writing to stop contacting you, it generally must stop, except to confirm it's ending collection or to tell you about specific actions like a lawsuit.
• Call frequency. Regulation F presumes a collector is violating the law if it calls you about a debt more than seven times within seven days, or within seven days after a phone conversation about that debt (12 CFR § 1006.14).

Telling a collector to stop contacting you doesn't erase the debt or stop it from being reported, so pair it with a validation request if you're unsure the debt is yours.

Most charge-offs and collections can be reported for seven years. Under FCRA § 605 (1681c) the seven-year period begins 180 days after the delinquency that led to the charge-off or collection, and it doesn't restart when a debt is sold or paid. The reporting period is separate from your state's statute of limitations for lawsuits. See how long negative items stay.

Every state sets a statute of limitations for suing on a debt. Once it has passed, the debt is "time-barred," and under Regulation F a collector can't sue or threaten to sue you over it (12 CFR § 1006.26). The debt may still exist, and the collector may still ask you to pay.

Be careful before making a partial payment on an old debt. In some states, a payment or a written acknowledgment can restart the statute of limitations (CFPB). Payment doesn't restart the credit-reporting clock, though: that's tied to the original delinquency date.

Under the FDCPA (15 U.S.C. § 1692g), third-party collectors must send you a validation notice with details about the debt. If you dispute in writing within the 30-day validation period, the collector must stop collecting until it sends you verification. Regulation F adds detail on what the notice must include (CFPB). Template guidance: debt validation letters.

Collectors also can't use false or misleading representations, including about the amount or legal status of a debt (§ 1692e), and under Regulation F they can't sue or threaten to sue on a debt that's past the statute of limitations.

• Confirm the debt is yours and the amount is right. Ask for validation if you're not sure.
• Check the dates, especially the date of first delinquency.
• Look for duplicates: the original and collection accounts both showing a balance, or two collectors for one debt.
• Dispute anything inaccurate, incomplete, or unverifiable with the bureaus and the collector.
• If you choose to pay, get any agreement in writing first. Paid collections usually update to $0 rather than disappearing, though some newer scoring models disregard paid collections. More: pay for delete.
• Before paying an old debt, check your state's statute of limitations; in some states a payment can restart the lawsuit clock (not the credit-reporting clock).

Medical collections have their own rules; see medical debt and your credit report.

1. 1Confirm the debt first through validation, and confirm who owns it now.
2. 2Get the terms in writing before paying: the amount, that it settles the debt in full, and how the account will be reported.
3. 3Pay in a traceable way, never by giving a collector ongoing access to your bank account.
4. 4Keep the settlement letter and proof of payment indefinitely, in case the debt resurfaces.
5. 5Check your reports a month or two later to confirm the account updated as agreed.

Forgiven debt can have tax consequences. If $600 or more is canceled, the creditor may send you a Form 1099-C, and canceled debt may count as taxable income unless an exception applies (IRS Topic 431).